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VMware Inc. Tumbles on Weak Guidance

By Timothy Green - Jan 27, 2016 at 3:37PM

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The cloud-computing giant reported solid fourth-quarter numbers, but layoffs and slashed guidance for 2016 sent the stock lower.

What: Shares of virtualization and cloud infrastructure provider VMware (VMW -1.35%) slumped on Wednesday following the company's fourth-quarter earnings report. While revenue and earnings both beat analyst expectations, guidance for 2016 was slashed. At 2:45 p.m. ET, the stock was down about 10%.

So what: VMware reported quarterly revenue of $1.87 billion, up 10% year over year and slightly higher than analyst expectations. License revenue rose 6% year over year, or 11% adjusting for currency, while services revenue increased by 12.6%.

Non-GAAP earnings came in at $1.26 per share, up from $1.08 per share during the prior-year period, and $0.01 higher than the average analyst estimate. On a GAAP basis, EPS was $0.88, up from $0.75 one year ago. Free cash flow jumped 36% year over year to $429 million.

While VMware's results were solid, guidance for 2016 was disappointing. The company lowered its revenue expectations for the year to growth of 2% to 4%, down from previous guidance calling for a high-single-digit to low-double-digit percentage increase. Non-GAAP EPS is expected to be between $4.07 and $4.16, barely higher than the $4.06 reported for 2015.

Now what: In addition to guiding for far slower growth, VMware announced that it was laying off 800 employees. The company plans to take a $55 million to $65 million charge related to these layoffs during the first half of the year. CFO Jonathan Chadwick is also leaving the company, with EMC CFO Zane Rowe set to take his place.

After years of rapid growth, VMware's revenue growth is set to slow to a crawl in 2016, and earnings will be essentially flat. It's not surprising, then, that investors have pushed the stock lower. The stock now trades at roughly 11 times 2016 non-GAAP earnings, a far cry from the earnings multiples that VMware used to enjoy.

Investors should always be focused on the long-term picture, and while one lackluster year certainly doesn't mean that VMware will never grow quickly again, weak guidance and layoffs are good reasons to be concerned.

Timothy Green has no position in any stocks mentioned. The Motley Fool recommends VMware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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